Should we regulate Facebook like a railroad?

Share this:

Facebook CEO Mark Zuckerberg pauses while speaking as he testifies before a joint hearing of the Commerce and Judiciary Committees on Capitol Hill in Washington, Tuesday, April 10, 2018, about the use of Facebook data to target American voters in the 2016 election. (AP Photo/Alex Brandon)

After the revelations of how information that customers thought was private was manipulated in the last election, Facebook and Google (the owner of YouTube) are facing the risk of being designated as regulated utilities.

The path from private monopoly to regulated utility is well trod in the United States. It is often premised on the economic condition called network effects, which characterizes Facebook, and is sparked by charges of abuse, such as Facebook and YouTube are both now encountering.

Telephones, railroads and electricity providers all started out in America as private, free-market entities. Eventually, however, each became subject to the regulation of a government agency, both as to the prices of their services and the requirements of what they had to provide.

Economists generally prefer private market solutions to government regulation. This is out of a well-justified fear that government regulators will shield companies from competition, dulling their incentive to innovate. Further, government regulators will occasionally yield to political pressure — to protect union jobs, for instance, on U.S. airlines when they were regulated by the Civil Aeronautics Board, and on American railroads under the Interstate Commerce Commission.

The case for regulation that overcomes economists’ hesitations, however, is where an industry is characterized by these network effects. Telephone companies originated as individual competitors in America, but to call someone, you had to be sure that person was using the same telephone company you were. The more customers one company signed up, the greater its ability to market its product. That led inevitably to monopoly; and, in response, government regulation. Facebook has this same network effects characteristic. Although there are competing social media providers, Facebook users value Facebook more the greater the size of the Facebook network. Facebook’s eventual dominance thus became inevitable.

YouTube does not possess that characteristic to the same degree; however, it enjoys legal immunity for most of the content it carries, and that benefit is usually reserved for common carriers. A railroad bears no liability for the use to which the goods it carries are eventually put. The public-policy attack on YouTube is that it must accept common-carrier status or lose its immunity. A newspaper has to bear responsibility for the consequences of false stories it carries: why not YouTube?

“Common carrier” designation dates from 1887, when the Interstate Commerce Commission imposed it on railroads that had achieved local monopolies in various parts of the country. More recently, the President Obama-era Federal Communications Commission imposed that status on internet service providers (ISPs) like Comcast, AT&T and Verizon, allowing the FCC to require “net neutrality.” That regulation banned ISP’s from favoring some customers over others. (The Trump FCC has reversed that policy.)

The first regulation that would confront Facebook would likely address privacy protection for users. Once made to be a common carrier, however, Facebook could find itself regulated in many other ways: what Facebook charges for advertising, how it sells the information it gathers on individual subscribers and how vigorously it verifies the legitimacy of those establishing accounts. The earnings of a regulated utility are also subject to control, a jarring prospect for the investors in Facebook, currently valued at a half-trillion dollars.

In the last century, challenges under the Constitution were raised to the government subjecting private companies to common-carrier obligations, but those challenges were defeated. The Supreme Court ruled that to regulate a railroad, telephone or electric company is not the same as to “take” their assets — the latter requiring government compensation.

Turning YouTube into a regulated utility would be a stretch: there appears no strong economic case for doing so. The U.S. government, however, has taken regulatory control over private companies in the past because of network effects no greater than those in the Facebook instance. The new privacy protections Facebook has volunteered to its users are part of its race against the alternative of a regime of government regulation.

Tom Campbell is a professor of economics and of law at Chapman University. He was a congressman for five terms, a state Senator and director of finance for the state of California.